I Made a Killing When I Sold My Home. Will I Owe Taxes?

If you’ve sold a home recently, there’s a good chance you walked away with a substantial gain. In many markets, home prices have reached all-time highs, especially over the past few years. While that kind of windfall can feel like winning the lottery, the next question is often less exciting: 

Will I owe taxes on the sale of my home? 

The answer: maybe. The IRS does allow a generous capital gains exclusion on the sale of your primary residence—but only if certain rules are met. And depending on how the home is owned, the timing of the sale, and your broader financial situation, you might be in for a surprise when tax time comes around. 

Let’s walk through the key factors that determine whether your profit is tax-free—or at least partially so. 

The $250,000 / $500,000 Capital Gains Exclusion 

The IRS allows individuals to exclude up to $250,000 of capital gains on the sale of a primary residence, or $500,000 for married couples filing jointly. But this exclusion comes with a few important conditions: 

• Ownership and use test: You must have owned and lived in the home for at least two out of the last five years before the sale. These two years do not need to be consecutive. 

• Primary residence requirement: The exclusion only applies to your main home, not vacation properties, rentals, or investment real estate. 

• Frequency limit: You can only use the exclusion once every two years. 

If you meet all these requirements, you can exclude up to $250,000 (or $500,000 for couples) of the gain on the sale from your taxable income. Any gain above that threshold, however, may be subject to capital gains tax. 

Example: 
Let’s say you and your spouse bought a home in 2010 for $300,000 and sold it in 2025 for $900,000. That’s a $600,000 gain. If the home was your primary residence for at least two of the last five years, you could exclude $500,000 of that gain. The remaining $100,000 could be taxable. 

What Happens When a Spouse Dies? 

If you’re a surviving spouse and sell your home after your partner’s death, the rules become more nuanced. First, it’s important to understand that step-up in basis and the capital gains exclusion are two separate things. 

When someone passes away, the surviving spouse may receive a step-up in basis—meaning the value of the home is reset to its fair market value at the date of death. In community property states, the entire home may receive this step-up. In common law states, only the deceased spouse’s share receives a step-up. 

In many cases, if the surviving spouse sells the home within two years of the spouse’s death, they can still qualify for the full $500,000 exclusion, assuming the ownership and use tests are met. 

Timing is important. Waiting too long to sell the home could reduce both your exclusion and your step-up benefits, so it’s wise to consult your financial or tax advisor before making any decisions. 

What About Homes in Trusts? 

Things get more complicated when a home is owned by an irrevocable trust. In general, homes in revocable living trusts don’t present much of an issue—as these are considered “grantor trusts” where the IRS treats the assets as if they’re still owned by the individual. 

But with irrevocable trusts, especially when the homeowner is no longer considered the beneficial owner, things get tricky: 

• The home may not qualify as a primary residence for exclusion purposes, since the trust is considered the owner. 

• Depending on how the trust is structured, step-up in basis at death may or may not apply. 

• Capital gains from the sale may be taxable at trust tax rates, which can be significantly higher than individual rates. 

This is where careful estate and tax planning becomes essential. For aging homeowners, especially those with health concerns or long-term care needs, the decision to transfer a home to a trust—or to retain ownership—should be weighed against the potential tax consequences. What might seem like a good idea for asset protection or Medicaid planning could come with a costly tax bill later. 

Keep Good Records: Home Improvements Matter 

One of the best tools you have to reduce your taxable gain is an accurate record of capital improvements. These are expenses that add to the value of your home, prolong its life, or adapt it to new uses—and they can be added to your cost basis, effectively reducing your taxable gain when you sell. 

Capital improvements include: 

• Room additions or major remodels 

• New roofs, windows, siding 

• Upgraded HVAC, electrical, or plumbing systems 

• Driveway replacements or expansions 

• Energy-efficient upgrades (solar panels, insulation) 

What doesn’t count: 

• Routine maintenance (painting, lawn care, cleaning) 

• Repairs (fixing a leaky faucet, patching drywall) 

• Cosmetic upgrades that don’t materially improve value 

Even small improvements add up over time, especially if you’ve owned the home for decades. Keeping receipts, contractor invoices, or before-and-after photos can make a big difference in the event of an audit. 

Final Thoughts 

The surge in home prices has created unexpected financial wins for many homeowners—but those wins can come with tax surprises. Understanding the IRS rules around capital gains exclusions, basis adjustments at death, and ownership structures like trusts is crucial when deciding how and when to sell your home. 

If you’re nearing retirement, recently widowed, or considering estate planning strategies involving your home, a thoughtful approach can help you avoid tax pitfalls and make the most of your investment. 

Have questions about your own situation? Whether you’re navigating a home sale, trust planning, or looking to preserve tax advantages for your family, we’re here to help.